other hand, when all banks are responsible for monitoring, some of them are likely to do a less than perfect job and trust that the other banks will find any irregularities in their monitoring effort, and address the issue accordingly. The lack of coordination between the banks in the syndicate creates a sub-optimal monitoring situation.
The results from BootRegression(2) show Bank entering the regression with a positive sign, indicating that companies with no or multiple banking relationships indeed experience a higher underpricing of their IPOs on average. These results are also evident when looking at Regression(2). However, the variable is not significant in any of these regressions, which means that we cannot say that the variable has any effect on offer-size adjusted underpricing. We cannot conclude that the impact on
underpricing of having no or multiple banking relationships is different from zero from a company’s perspective. This may indicate that for the company there are no consequences in regards to underpricing of having no or multiple banking relationships, and thus a company should decide the number of bank relationships with other objectives in mind.
If we look at the effect of banking relationships from an investor’s perspective on the other hand, results from BootRegression(1) and Regression(1) shows a positive and statistically significant (10%) coefficient on the variable. Although having no or multiple bank relationships do not have a significant impact on the underpricing from the company’s perspective; it does from an investor’s perspective.
Consequently, the sub-optimal situation of no or multiple bank relationships leads to higher underpricing of IPOs from an investor’s perspective on average. The result from BootRegression(1) without outliers further supports this, as the coefficient for Bank is significant on a 10% level. We can thus confirm Hypothesis 8 from an investor’s perspective; companies with no or multiple bank relationships experience higher underpricing than companies with a single bank relationship.
and Sweden respectively in the period 2002 – 2015. Although much research has been done on the subject, no conclusive explanation has been presented, and there are numerous theories as to why underpricing occurs. In this thesis we have used existing theories to try to find specific characteristics regarding a company or market conditions that indicates that an IPO will be underpriced, with the aim of making recommendations for retail investors so they can make a positive initial return.
Our problem statement is as follows
Are there any characteristics of Scandinavian firms and/or markets that can be used to predict the level of underpricing so as to earn an initial return on the first day of trading?
Our findings prove that most of the theories chosen do a poor job in explaining the IPO underpricing that occurred in Scandinavia in the period 2002 – 2015. Though we get some significant results, most of them points towards proving the opposite of what the theories predict.
Chambers and Dimson presumed that more mature and stable firms should expect lower underpricing.
Our results are statistically significant and point in the opposite direction; larger firms are more underpriced, on average, in our sample. Further, Ritter argued that underpricing should be lower for established firms going public, compared to younger firms. We find statistically significant results demonstrating that older firms are more underpriced than younger firms, on average.
We do however find statistically significant results confirming the theory presented by Carletti, Cerasi and Daltung arguing that firms with one banking relationship are less underpriced than firms with no or multiple banking relationships.
We do not find support for Ibbotson and Jaffe’s Hot Issue market theory, but we do find support for Adams, Thornton and Hall’s theory regarding irrational investor exuberance in times of high market performance. The variable tied to the hot issue theory enters the regression with the opposite sign of traditional theory. As we theorized that the effect would be opposite, higher underpricing in cold issue;
the signs of the variable support our expectations. Unfortunately, the variable fails to be statistically significant. The coefficient on the variable representing Hypothesis 7, relating to the window of opportunity theory, supports previous research from both an investor’s and the company’s
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perspective. The coefficient appears negative in both regressions, indicating that listing on an exchange when the market is performing below average, underpricing is lower on average. Unfortunately, also this variable fails to be statistically significant in both regressions.
Beatty and Ritter, and Carter and Manaster both argued that prestigious underwriters underprice less than others, and that companies hiring a reputable underwriter to conduct their IPO should experience less underpricing on average. We found no evidence of this being true. In fact the variable entered our regression with the opposite sign of what was expected, and were not statistically significant.
Lastly, the theories relating to insider ownership by Shleifer and Vishny, Booth and Chua and Brennan and Franks, were not confirmed. They all predicted that underpricing should increase with the degree of insider ownership, as insiders wants dispersed ownership post-IPO and use underpricing as a tool to achieve this. Our results are opposite of what was hypothesized and failed to be statistically significant at any traditional significance level.
The hypotheses have been tested using a multiple non-parametric bootstrap regression. A variable or proxy was selected for each of the individual hypotheses. We used non-parametric bootstrap to overcome the violation of the OLS assumption regarding normality of errors. We also performed the regressions without outliers found using Cook’s D in order to test the robustness of model. Most results were robust for outliers, the largest difference being that industry dummy Materials became statistically significant at a 5% level.
The thesis contributed to the existing literature by using a unique dataset and investigating
underpricing in the Scandinavian market as a whole. To the best of our knowledge, there has been no investigation of the impact of using a reputable underwriter or the number of banking relationships on underpricing in the Scandinavian market. Our findings challenge the results of several renowned researchers by disproving some popular theories of underpricing on the Scandinavian market.
However, most of the theories could not be supported by our data, and we found few significant relationships. This suggest that as the existing theories do a poor job in explaining IPO underpricing in
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Scandinavia, either new theories or further research on existing theories are required to completely explain the IPO underpricing evident in the Scandinavian market.